Thursday, August 29, 2013

Mortgage Commitement Letters - For Buyers Only

Many versions of Mortgage Commitment Letters exist within the commercial mortgage market. This document provides written proof that the lender is willing to loan a specific sum, by way of a set mortgage amount, which allows the Buyer to complete the purchase of the property. They can be ‘conditional’ or ‘non-conditional’, but in most instances they are conditional - meaning the Buyer (or mortgagor) must meet certain conditions in order to qualify for the advance of funds.

Typically it should contain much of the following:

·        Mortgagor Details – Name, address, postal, email coordinates
·        Collateral – Description of the property type and location
·        Interest Rate – Fixed or Variable
·        Term – Set for a specific period
·        Amortization – Time period for 100% payback
·        Title Insurance – possible requirement
·        Survey – possible requirement
·        Guarantor Requirements – corporate/personal
·        Prepayment Options – if any (NB: if not included, mortgage is closed)
·        Expenses – All costs to lender, including legal,registration, and admin.
·        Secondary Financing – may not be permitted and excluded specifically
·        Expiration Date – time period by which MCL is executed & mortgage finalized

Specifically in the case of a conditional MCL, it  may include the following:

·        Satisfactory Environmental Report(s)
·        Full Appraisal Report (supportive of the value)
·        Structural/Physical Building Report (indicating no deficiencies)
·        Financial Reports – either corporate or personal as necessary
·        Credit Reports – to the satisfaction of the lender

Again, be aware that any conditions contained in the MCL must be met before the commitment is set and binding. As always, the DEVIL IS IN THE DETAILS, so make sure you understand the requirements as they are contained within the letter to ensure your funding is in place come closing date.

As a final note, it is always a good idea to review a MCL with your lawyer upon receipt, and especially given the fact that much of it affects their task in closing the transaction.   

Friday, August 9, 2013

Mortgage Discharge Penalties - Cost of Early Payout (Attention: Sellers)

One of the more controversial aspects relating to commercial mortgages, are the discharge costs to pay off a mortgage prior to its maturity date. There is realistically no common method of determining an early payout cost, as most typical commercial mortgages are deemed “closed” – meaning they run until maturity, without allowing for an early payout provision.

If a lender is to agree to an early payout of an existing mortgage, some of the more common discharge penalties may include:

·        Three months interest cost (based on the current balance)
·        Interest rate differential (actual interest rate vs. the re-lending/current rate)
·        Greater of either of the above 2 methods
·        100% interest recovery for the balance of the term (ouch!)
·        Any variation of the above (AKA – negotiating a better discharge fee)

It is important to note, that the lending institution has an obligation to outline the penalty that they could charge within the actual mortgage document. But this assumes, that you review (read) this detail within the mortgage terms, and that you understand what the financial consequences may be at some point within the mortgage term. This is a clear planning matter at the time of closing a deal and advancing a mortgage – your plans should account for such contingencies, so that there are no major financial surprises later on.

Other suggestions may include – negotiating with the Buyer to return to your lender for financing, paying down the rate for a prospective buyer to remain with the lender, or perhaps financing other properties with the lender. Lender’s are often more negotiable, if they can gain new business as an offset to the loss of the mortgage being discharged.

As always, SELLERS seek out the advice of experienced commercial realtors within your market, ensuring you account for discharge penalties on all existing financing prior to marketing the property. There may be more negotiating to do, than just with the Buyer!